Q4 2023 Earnings Summary
- Portillo's successful expansion into new markets like Texas is driving significant revenue growth and operational efficiencies. In the Dallas-Fort Worth area, they've gone from zero to four restaurants in just over a year, with a fifth opening soon. The initial location, The Colony, had a "ridiculously good first year," and new locations like Arlington and Fort Worth are off to great starts. This rapid expansion allows Portillo's to achieve scale benefits, including supply chain and staffing efficiencies, and increased brand presence leading to higher customer traffic. The upcoming entry into Houston is expected to be "every bit as good" as Dallas, with plans to reach scale quickly in that market.
- New restaurants are performing strongly with high Average Unit Volumes (AUVs), indicating successful growth beyond their core Chicago market. The Class of 2022 restaurants are trending at an $8 million AUV in their first year, and management is "very happy about the performance," especially in outer markets like Fort Worth, Texas, and Claremont, Florida. This strong performance of new units supports the company's aggressive expansion plans.
- Operational excellence leading to all-time high guest satisfaction scores is driving broad-based traffic growth. Management emphasizes that "being operationally excellent is probably the most important lever to use to drive traffic," and they've invested in initiatives like retrofitting 17 restaurants with streamlined kitchens and grab-and-go options, with plans for another 20 retrofits this year. This focus on efficiency and guest experience has resulted in improvements across all customer segments and channels, contributing to the company's strong financial performance.
- Margin degradation is expected in 2024 due to new restaurant openings, as these restaurants generally start with lower margins in the high teens, compared to the 20-plus percent margins of established restaurants.
- Portillo's may not fully offset labor and commodity inflation through price increases, given concerns about the shaky consumer sentiment and competitive landscape, potentially putting pressure on margins.
- The performance of the Class of 2023 new restaurants is uncertain, as many opened recently in Q4, and it's too early to assess their performance, presenting potential risks to expected growth.
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Margin Outlook
Q: How will new units and inflation affect margins?
A: Management expects some margin degradation due to the addition of new restaurants, which typically start with high teens margins in their first year. They are focusing on operational efficiencies, retrofitting over 20 restaurants in 2024 to combat margin pressures. They aim to buffer against margin degradation despite the impact of new units and inflationary pressures.
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Sales and Traffic Trends
Q: What are the comp trends and traffic expectations?
A: The company saw positive traffic trends across all markets in Q4 , driven by operational excellence and multi-channel capabilities. They feel good about the health of the business despite any choppiness in Q1 due to weather or consumer sentiment.
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New Unit Performance
Q: How are new units performing, especially in Texas and Arizona?
A: New units in Texas, particularly Arlington and Fort Worth, have gotten off to great starts. In Arizona, achieving scale has led to revenue and margin synergies, with plans to open more restaurants to leverage this scale. The class of 2023 is too new to fully assess, but management is pleased with early performance.
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Advertising Strategy
Q: What is the advertising plan and its impact on traffic?
A: The company uses advertising selectively, pulsing in and out of markets like Chicago as appropriate. They believe the best way to drive traffic is through operational excellence but also utilize TV and ad campaigns when needed. They have quirky marketing campaigns coming up with new salads to drive visitation.
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Operational Improvements
Q: What operational changes are planned to improve efficiency?
A: They are retrofitting over 20 restaurants in 2024 to streamline kitchens and enhance efficiencies. The new kitchen designs and shorter kitchen lines are improving staffing and productivity , and they are passionate about efficiency and lean practices.
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Expansion Strategy
Q: What are the plans for expansion in Houston and Phoenix?
A: The company will open its first few restaurants in Houston this year, expecting performance similar to Dallas-Fort Worth. In Phoenix, they are approaching scale with seven restaurants and plan to open more to leverage revenue and margin synergies.
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Speed of Service
Q: How is speed of service impacting traffic and margins?
A: Management is focusing on improving speed of service, especially in the drive-through, as a 32-second improvement can represent a 1% comp increase. They aim to balance speed with accuracy and friendliness to enhance customer satisfaction and throughput.
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Portillo's Pickup Format
Q: What are the learnings from the new Portillo's Pickup locations?
A: The first Portillo's Pickup in Joliet exceeded expectations but revealed overbuilt kitchens and underestimated walk-in business. The second location in Rosemont is performing well, and they plan to perfect the model before expanding this format more broadly.
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Catering Business
Q: How did catering affect fourth-quarter comps?
A: Catering saw growth in the fourth quarter compared to last year, partly due to weather impacts in the prior year. It wasn't outweighed in Q4 but represents a real opportunity, especially in outer markets, to push this channel.
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Impact of Weather and 53-Week Year
Q: How does the 53-week year impact comps, and what about weather effects?
A: The 53rd week has no impact on the comp as they reported a 53-week comp number to align the comparison. While the company is not immune to weather impacts seen in Q1, they feel good about the business's health and trends outside of weather-related effects.
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